SEC begins hearings on McGinn Smith frozen assets

A hearing to determine whether the assets of McGinn Smith & Co. should remain frozen got underway June 9 with the U.S. Securities and Exchange Commission calling the first witnesses.

The U.S. District Court in Albany, N.Y. froze the assets of the Albany investment firm on April 20, after the SEC charged the firm, and principals Timothy McGinn and David Smith, with running a Ponzi scheme. The SEC claims the pair raised more than $130 million from investors through four funds and several trusts, and used the money to support their fledgling businesses and lavish lifestyles. The government agency puts the “ill gotten gains” from the alleged scheme at $84 million.

Also on April 20, McGinn Smith and 81 affiliated companies were put under the control of a receiver, William Brown of the law firm Phillips Lytle LLP. On June 9, the Hon. David Homer, the federal judge assigned to the case, agreed to a petition to remove one of those entities, Pine Street Capital Partners, an Albany mezzanine fund, from Brown’s control.

Brown was the first witness of the day. He testified to the “somewhat daunting experience” of gathering information on so many entities. His primary efforts have revolved around “bringing normalcy” to the McGinn Smith companies that are still operating—primarily those involved in servicing alarm and cable television contracts in Georgia, Alabama and Florida—and making sure they were cash-flow neutral.

He testified that as of June 2, all frozen McGinn Smith bank accounts contained a total of nearly $1 million. This includes $222,000 received from Carnival Cruise Lines, as a settlement for a canceled Halloween cruise booked by one McGinn Smith company. Had Brown not worked out a deal with Carnival, McGinn Smith could have lost about $700,000 in deposits and penalties.

Brown said that if his receivership is made permanent—one of the things Judge Homer will decide as a result of the hearing—"I think that we are near the start of the second stage.” That stage, he said, will be to “truly ascertain the value of assets and liabilities” including some area properties in which McGinn Smith had an interest. While these assets have a value on paper “there is one thing to look at a balance sheet. The reality is what I can sell that asset for today.”

Next to take the stand was Israel Maya, a broker-dealer inspector for the SEC. Maya told the court he had examined 35 Quicken files to determine that the four main investment funds McGinn Smith operated, those at the heart of the SEC case against the firm, raised a total of $106 million. Of that, $23 million was returned to investors.

Of the $106 million, $3.6 million went into liquid investments. That portfolio has a current market value of $1.5 million. The remainder went into illiquid, private companies. Maya determined that half of these were affiliates of McGinn Smith.

The SEC then called as a witness Roseanne Daniello, a staff accountant for the agency. Daniello had looked through bank accounts, canceled checks and wire transfers to report on the movement of money into and out of the various funds and trusts.

She was confronted by Albany attorney James Featherstonhaugh, who is representing Lynn Smith, David Smith’s wife and a relief defendant in the case. Featherstonhaugh asked if Daniello had any knowledge of who had ordered each transfer or what its purpose was. Each time, she responded “no.”